Carbon nation

News

Cite as: September 2012 86 (09) LIJ, p.20.

Lawyers need to know about carbon pricing and what it means for their clients.

It’s a sign of the times that Australasia’s Carbon Expo 2012, to be held in Melbourne from 7-9 November, is a hot ticket in town. It is still early days, but the number of delegates is already up from 900 last year to 1200 this year. The number of countries participating has doubled from 20 to 40 and the number of trade booths has gone from 80 to 110.

July 1 this year marked the start of the carbon price tax and the day the climate change debate moved beyond speculation by sceptics about the science into action. The internationally agreed solution to the problem of global warming – reducing greenhouse gases by cutting carbon emissions through taxing emitters – is now firmly part of the business landscape as a legal requirement for the 500-odd Australian companies directly affected by it. The new tax is also a business opportunity with regard to emissions trading.

The jump in interest in the November expo reflects the business community’s desire for information and understanding about this major new government reform. It also signals the enormous interest in and potential of the emissions trading scheme.

For law firms there is a tranche of new work leading from the controversial reform – not least because it is so poorly understood.

Experts warn lawyers must:

understand carbon issues specifically and be able to apply carbon pricing to broader legal practices;

advise clients of their compliance obligations; and

use carbon pricing in context when providing specialist advice within their own discipline.

“It’s early days but there’s a bit of blood on the floor of companies not getting ready,” Carbon Market Institute chief executive Mike Tournier said. “The clean energy legislation package still remains the most poorly understood and misrepresented piece of legislation in Australian law.”

“And because of this managers are losing their jobs, companies are going to the ACCC. People don’t have a context and are failing to seek advice where they should. There is a poor understanding of how it’s applied, what you can and cannot do. Boards and senior managers and industry professionals need to get across the legal framework and the key elements within it.”

Mr Tournier said the introduction of the carbon pricing mechanism was a significant paradigm shift in the business environment.

“In five to 10 years it will be business as usual. But now, many businesses are struggling to get a clear picture on how to trade in this environment.

“If I am a small-to-medium business enterprise and I don’t know about putting my prices up I will contact my accountant and my lawyer.”

He said while the bigger players were well across the change “in smaller firms, opportunities attached to the carbon pricing mechanism need to be discussed and identified at board level.”

“The real opportunity for a legal practice is to understand carbon issues specifically. They can then apply it to their broader legal practices and advice. They can reach out to clients and point out the provisions under the law and their compliance obligations under the ACCC.

“They need to know how to work all this in a way that is transparent and robust and stands up to the scrutiny of regulators. All this needs very careful legal thinking.”

Brendan Bateman, a partner at Clayton Utz and co-author of the firm’s briefing paper “Understanding the Carbon Price Mechanism”, said while he was able to advise clients on the legislation and what it means, there are grey areas where – for example, forecasting of future emissions is required – that are difficult to quantify and resolve.

“It gets even more complicated because they [companies] get compensation from the government and you have to factor that into the carbon tax. It’s an ongoing issue,” Mr Bateman said.

LIV CEO Michael Brett Young said the carbon pricing mechanism was something law firms needed familiarity with so they could meet the needs of clients – both big and small now and in the future.

“Lawyers will need to be across this issue to properly advise their clients and keep up with changing requirements,” Mr Brett Young said.

If, in the future, the scheme is extended to include companies smaller than the 500 or so now in the firing line as the biggest polluters, it will affect more law firms, according to barrister and director of Clean Energy Research at Bond University Dr Damien Lockie.

“Clean energy law is currently more specialised, but if over time it extends . . . for example to small and medium enterprises, then it will affect more lawyers’ practices.”

Experts agree that there is a skills gap on carbon pricing in the legal profession.

“Whether it’s at university or CPD, people need to have a broad understanding of carbon and the legislative package and how it will impact clients,” Mr Tournier said. “It’s useful for the legal community to get a good understanding because it cuts across the whole economy. Lawyers can use it in context when providing specialist advice within their own discipline.”

Dr Lockie said that while clean energy law was new it didn’t really fit into one classification, such as environment law. “It also covers corporate and commercial, taxation and financial markets.”

He said at this stage it was an elective university subject though he would like to see his book Clean Energy Law in Australia become a part of every lawyer’s legal library.

Mr Bateman, an environmental lawyer since 1998, said carbon pricing was not only an environmental issue. The mechanisms used were much broader and covered corporate, banking, mergers and acquisition, planning, property and financial services. “It’s across the board, across all jurisdictions. It will be another area you look at in a transaction, another thing to consider, part of the mix.

“Clayton Utz has a multi-disciplinary approach. We have certain people who are the champions. They have more understanding of climate change and carbon markets and they are supported by a number of specialists like banking and finance, insurance and property. We are briefing the entire firm and the specialists.”

Risk is identified as a key area for law firms in the carbon pricing area.

“Law firm work includes compliance advice – this includes registration, measurement and reporting, and liability under the Clean Energy Act 2011, and also review of claims for compliance with the Competition and Consumer Act 2010. In time, there will also be work in administrative areas, such as handling audits and defending prosecution by the Clean Energy Regulator,” Dr Damien Lockie said.

The ACCC has told business that if it is claiming a price rise is linked to the carbon scheme, the claim must be true and based on information relevant to the business. If the ACCC has any concerns, it will issue a notice asking for documents which substantiate their carbon price claims. If the ACCC is not satisfied, it may issue infringement notices or take court action against the business.

Nor are businesses allowed to make inaccurate or exaggerated claims about the impact of the carbon scheme during commercial transactions. A misled business may be able to sue for damages as a result of the misleading and deceptive conduct.

There is also the suggestion that businesses which try to price gouge could be opening the door to a new wave of consumer class actions. Australian consumer law allows the ACCC to bring a class action on behalf of consumers who have been misled about the cause of the increased prices for goods or services. Class actions could be run against a range of businesses, large and small, public and private, regardless of whether the misrepresentation was deliberate or inadvertent.

Along with new legal powers, the federal government has given the ACCC an extra $12.8 million to monitor carbon price increases. Businesses that make misleading claims face fines of up to $1.1 million for each breach.

In the first 10 days of the controversial scheme’s operation, there were 630 carbon price-related complaints, or 63 complaints a day made to the competition watchdog.

In the weeks after the tax’s introduction, the number of carbon-related complaints dropped to about 45 a day.

ACCC chairman Rod Sims said the most carbon-related complaints came from the energy, landfill, refrigerant and building sectors, but also hairdressers, cafes, petrol stations, supermarkets and dry cleaners.

Warning or “educative” letters have been sent to about 30 businesses.

Mr Bateman said businesses would make reasonable decisions and assessments with the information they have but it was still early days to tell whether that would give rise to an action against them.

Mr Tournier added that as the scheme matures, the legal issues around it would change.

“It’s brand new. What advice is being sought and mistakes made now will be completely different to what’s happening in five years as things settle down. It will become more mature and informed.”

That’s if it lasts that long.

Adding a certain amount of instability to carbon reform is its uncertain future under a Coalition government. Opposition leader Tony Abbott has said he will scrap it.

“The political uncertainty has definitely impacted,” Dr Lockie said.

“Of course, lawyers are used to change, so we accept that a new area of law will develop over time. In the broader picture, Australia needs to consider how it is perceived internationally if it introduces such a major reform as carbon pricing, only to undo it in a couple of years – that doesn’t help how our sovereign risk is viewed.”

As for how the carbon tax will directly affect law firms as businesses, Dr Lockie said the legal industry would be a “price taker”.

“This means law firms will need to factor in the increases in input costs brought about by the carbon price, in setting the future price of their services. This includes the direct effect of increases in energy, transport and food prices and the indirect effects of items such as waste to landfill.

Treasury estimates that only an average $9 out of every $100 of an electricity bill will be due to the carbon price. Across Australia, all prices are estimated to rise by less than 1 per cent. But for the average law firm, the impact will need to be examined on a case-by-case basis.

For the first three years the carbon price will be fixed as a tax, before moving to an emissions trading scheme in 2015. In the fixed price stage, which started on 1 July, the carbon price was set at $23 a tonne, rising at 2.5 per cent a year in real terms, to $24.15 in 2013-14 and $25.40 in 2014-15. From 1 July, 2015, the carbon price will be set by the market, starting with a floor price of $15 per tonne. The Climate Change Authority will oversee the performance of the carbon price and other clean energy initiatives, and advise government.

What lawyers should know

Businesses need to be aware of the following legal implications:

the utility of contract provisions which pass on the direct and indirect costs of the carbon pricing mechanism (CPM) and provide an incentive to minimise these costs;

allocation of liability under the CPM within corporate groups or within unincorporated joint ventures, including having regard to both statutory and contractual liability, whether liability transfer certificates are required and cost transfer and allocation mechanisms;

management of CPM liability through the implementation of effective compliance programs;

entitlement to government compensation or assistance under the Jobs and Competitiveness Program and availability of grants and tax deductions;

reworking of existing contracts to introduce clauses regarding the CPM and introduction of new pricing provisions to new contracts to address the future fluctuating value of carbon;

determination of the CPM’s impact on asset values and earnings;

determination of the CPM’s impact on company disclosure obligations;

whether a financial services licence is required to trade or deal in carbon units or eligible international credits;

recognition of opportunities to reduce costs and increase in profits through fuel switch, supply switch, increased efficiency, market opportunities; and